macro notes: australian rare-earths

Following on from last week's post on Chinese dominance (and this Brad Setser tweet), there was a significant building block of the "brake" that the US administration is focusing on that was put into place this week. The US signed a deal with Australia committing financing for rare-earth production. This is significant in light of incredible economical changes and products requiring these minerals, including medical technology, decarbonization efforts, EVs and most importantly, chips. It's clear that this is going to be an important weapon in the battle for AI superiority. I wanted to dive into a bit of research on rare-earths and what further controls could mean for a few different economies.

The overall picture

1. Rare-earths belie their name: they're not actually rare. It's just the production process that's extremely complicated. And that's what China recognized a few decades back. They built on their existing endowment to build up (1) processes and (2) knowledge that's challenging (to say the least) to build from scratch.

2. The criticality is very country and context-specific, particularly with respect to mineral endowment, the relative importance of the minerals to industrial and economic development, and a strategic assessment of supply risks and volatility. These considerations then determine the mineral strategy of each country and/or region.
3. Two reasons China is able to dominate production:
   1. The toxic nature of the processes; there is a lack of focus on clean and sustainable setups.
   2. Manipulating the market.
4. The US is extremely dependent on a few important minerals: for example, 100% reliant on imports for gallium.
   

The current exchange of trade restrictions isn't wholly new, or limited to the current administration; The U.S. government launched an investigation into critical mineral imports this year, highlighting the push towards diversification. While (as mentioned above) rare-earth production build-up is a decades-long effor, changes are evident through the last 5 years:

There are longer term efforts put in as well (Off the brilliant consistent research from https://www.csis.org/):

In 2021, the United States had less than 1 percent of known global graphite reserves. But in 2022, a significant reserve of graphite, Graphite Creek, was identified in Alaska, with over 10 million metric tons of ore with an ore grade of 7.8 percent to 8 percent.

The Department of Defense awarded $37.5 million to Graphite One, a Canadian company, through the Defense Production Act.

The U.S. government is putting financial support behind efforts to diversify graphite sourcing. In September, the U.S. International Development Finance Corporation’s board of directors approved a $150 million loan to fund a graphite mining operation in Balama, Mozambique. The graphite will be sent to a Syrah’s processing facility in Louisiana, which received a $102.1 million loan from the U.S. Department of Energy’s Loan Programs Office earlier this year. It produces graphite-based active anode material, a key material used in lithium-ion batteries.

Indian Perspective

I came across a great resource in this file by EximBank India. India is very protective of exports, but a rapid increase in production over the last decade gives the country a lot of leverage in this domain.

My thoughts

With governments taking equity stakes, and being more protective of their exports, there'll probably be considerable capex in funding these mines and production processes; while smaller scale production is fine in the short term, there'll be a push for sustainable large scale production.

A trade deal between China and the US (should it ever happen) would result in easing of tensions, continuing a long term trend of a weaker dollar (despite strength in the past few months). Probably a great scenario for global markets with a risk-on period.

Japan is particularly exposed to market risks in this case.

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